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2018 (11) TMI 1703 - AT - Income TaxTP Adjustment - interest charged by the assessee from AE on the loan advanced to it which is not at arm length price which was borrowed by the assessee from ICICI Bahrain - HELD THAT - The assessee has advanced loan to its subsidiary Golden Harvest to set up a plant at Fujairah by borrowing the same from the ICICI Bank abroad . The assessee has charged the same rate from the AE at which the loan was borrowed from ICICI Bank i.e. LIBOR plus 250 basis points. In our view the issue is squarely covered by the various decisions as referred to hereinabove wherein it has been held that loan transactions to the AR have to be benchmarked on the basis of LIBOR. In the present case the transaction is benchmarked by the assessee by following CUP method by charging LIBOR plus 250 basis points i.e. the same rate of interest which is charged by the ICICI Bank from the assessee and it is for this reason we are not in agreement with the direction of the DRP on this issue. The case of the assessee is squarely covered by the decision of co-ordinate bench of the Tribunal in the case of Everest Kanto Cylinder Ltd. v. ACIT 2015 (12) TMI 683 - ITAT MUMBAI - We set aside the DRP direction and direct the AO to delete the addition. The ground no. 1 is resultantly allowed. Disallowance of hedging loss for hedging transaction with the AE - HELD THAT - The undisputed fact is that the contract is between the assessee and ICICI Bank Mumbai and not with the AE therefore we find merit in the contention of the assessee that the this is not an international within the meaning of section 92C - loan was taken for the purpose of advancing it to the foreign subsidiary. Therefore any expense or loss incurred in connection with that transaction would not be an international transaction between the assessee and the AE as the said loss or expense was incurred under a contract between the assessee and the third party - DRP has taken a incorrect view of the matter in upholding the order of AO on this issue. We definitely feel that the expenses in not in connection with the business of the assessee or out of commercial and business expediency of the business but disallowance by making TP adjustments is not correct . The AO could made the disallowance u/s 37 of the Act as not wholly and exclusively for the purpose of business Addition on account of notional interest by TPO on share application money invested by the assessee in overseas subsidiary - HELD THAT - The undisputed facts are that the assessee has advanced money as share application money to Golden Harvest a foreign AE to set up a plant in free trade zone in Sharjah. It is also undisputed that the AE could not convert the share application money into share capital by issuing shares to the assessee as the permission from the free trade zone authorities with whom the AE was registered was pending and this was the only sole reason for not issuing the shares in favour of the assessee. Now the issue before us is whether the share application money could be treated as loan and could be subjected to the transfer pricing provisions. After perusing the facts on record and going through the decision relied on by the Ld. A.R. we find that no income has accrued from the share application money to the assessee and therefore such transactions could not be subjected to transfer pricing provisions. In the case of Shell India Markets Pvt. Ltd. vs. ACIT 2014 (11) TMI 897 - BOMBAY HIGH COURT held that the provisions of chapter 10 of the Act would apply only when income arises from the international transactions.
Issues Involved:
1. Transfer Pricing Adjustment on Interest Charged from Associated Enterprise (AE). 2. Disallowance of Hedging Loss Incurred by the Assessee. 3. Addition on Account of Notional Interest on Share Application Money. Detailed Analysis: 1. Transfer Pricing Adjustment on Interest Charged from AE: The first issue pertains to the confirmation of the Transfer Pricing Officer (TPO) in making interest adjustments on the interest charged from the AE on the loan advanced. The assessee borrowed funds from ICICI Bank Bahrain to set up a manufacturing facility at Fujairah for its AE, Golden Harvest. The interest charged to Golden Harvest was the same as that paid to ICICI Bank (LIBOR plus 250 basis points). However, the TPO argued that the loan to the AE was unsecured, unlike the secured loan from ICICI, and thus bore additional risk. Consequently, the TPO benchmarked the interest rate at 5.82% using the Bloomberg database, resulting in an adjustment of ?62,77,368/-. The Disputes Resolution Panel (DRP) upheld this adjustment, reasoning that the assessee should have been compensated for the additional risk. The Tribunal, however, disagreed with the DRP, referencing multiple decisions that upheld the use of LIBOR for benchmarking loans denominated in foreign currency. The Tribunal cited the decision of the co-ordinate bench in Everest Kanto Cylinder Ltd. v. ACIT, which supported the use of LIBOR plus 250 basis points as an arm's length rate. Therefore, the Tribunal directed the deletion of the addition, allowing the assessee's appeal on this ground. 2. Disallowance of Hedging Loss Incurred by the Assessee: The second issue involves the disallowance of hedging loss of ?61,63,000/- incurred by the assessee. The loss was related to a hedging transaction undertaken to mitigate the risk of foreign exchange fluctuations on the loan advanced to Golden Harvest. The TPO treated this hedging loss as an international transaction, making an adjustment accordingly. The DRP upheld this view, stating that the hedging loss was directly attributable to the loan availed for the AE's benefit and thus fell under the definition of an international transaction per Section 92B of the Income Tax Act. The Tribunal, however, found merit in the assessee's contention that the hedging contract was between the assessee and ICICI Bank, Mumbai, an independent third party, and not with the AE. The Tribunal held that the loss was not an international transaction under Section 92C of the Act. It concluded that while the expense might not be wholly and exclusively for the business purpose of the assessee, it was not liable for transfer pricing adjustment. Therefore, the Tribunal directed the deletion of the disallowance, allowing the assessee's appeal on this ground. 3. Addition on Account of Notional Interest on Share Application Money: The third issue concerns the addition of notional interest on share application money invested by the assessee in its overseas subsidiary, Golden Harvest. The TPO treated the share application money, which remained unallotted for a long period, as an interest-free loan and applied an interest rate of 12.06%, resulting in an adjustment of ?2,44,20,173/-. The DRP upheld this adjustment, reasoning that in an arm's length situation, no third party would leave share application money unallotted for such a long period without compensation. The Tribunal, however, found that no income accrued from the share application money to the assessee and thus such transactions could not be subjected to transfer pricing provisions. Citing the Hon’ble Bombay High Court's decisions in Shell India Markets Pvt. Ltd. vs. ACIT and Equinox Business Parks (P.) Ltd. vs. Union of India, the Tribunal held that Chapter X of the Act applies only when income arises from international transactions. Consequently, the Tribunal reversed the DRP's direction and directed the deletion of the addition on account of notional interest, allowing the assessee's appeal on this ground. Conclusion: The Tribunal allowed the appeal of the assessee on all grounds, directing the deletion of the additions made by the AO based on the TPO's adjustments. The Tribunal emphasized the importance of adhering to established legal principles and precedents in determining the arm's length nature of transactions and the applicability of transfer pricing provisions.
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